The unprecedented terrorist attacks on the World Trade Center and the Pentagon sent shock waves through the domestic and international economies, making historical parallels nearly impossible to draw.
As a result, Wall Street research in some industries is now less about hard facts and more about gut feelings. Indeed, uncertainty is all that is certain.
"It's a lot of fun doing this job today," says A.G. Edwards banking analyst Diane Yates with a sad, sarcastic chuckle. "We don't have anything to look back to. We're charting history."
And no industry is closer to Sept. 11's economic ground zero than airlines. In just three weeks, airline companies have laid off thousands of workers and the federal government has stepped in with a $15 billion bailout. And with some consumers still afraid to fly, there's no telling what demand will look like in the coming months.
As a result, industry watchers are stymied. For example, Goldman Sachs airline analyst Glenn Engel looked for a historical precedent -- any historical precedent -- to help gauge consumer reaction to this crisis. He searched other industries, analyzing the poisoned-Tylenol panic of the early-1980s. "Even if I look at things like Tylenol, it had lots of substitutes," he says. "You could buy something other than Tylenol. But in
air travel, there's no substitute."
And even when consumer fears of flying do subside, the airline industry probably won't function the same way it did before Sept. 11. This possibly irrevocable change is precisely what makes it difficult to estimate future earnings for companies in this industry.
Even "in good times, people don't expect airline
earnings estimates to be correct," Engle adds. That's because small changes in the price of oil can wipe out earnings, consumer spending on flights varies almost as much as ticket prices, and labor woes beset most carriers. Plus, many airlines don't even have any earnings.
That's why Engel prefers to use a price-to-revenue valuation metric, which divides a stock's price by its sales over the trailing 12 months, rather than the more common method, the price-to-earnings ratio, which divides a stock's price by its after-tax earnings over a trailing, current or future 12-month period. But this year, analysts expect the airline industry to report the largest year-over-year revenue decline in history. "Even revenues aren't working," Engle says.
As a result, Engle and Yates have decided to wait until more economic data are issued in the wake of the terrorist attacks. Such statistics will help them understand what to expect not only from the economy, but also from healthy companies in certain industries after Sept. 11.
"We just have to go with the flow and be apt to move expectations as events develop," says Yates.
So instead of predicting trends, airline analysts will react to them -- at least in the short term.
But not every industry has been significantly affected by the terrorist attacks. For the airfreight industry, which, of course, also had its planes grounded immediately after the attacks, little has changed, according to analysts.
During the suspension of air traffic, many airfreight companies shipped packages through the ground networks. Because the number of packages temporarily held was smaller than the usual pre-Christmas rush and any backlogs were cleared a day after the Federal Aviation Administration reopened the skies, these companies will see only a slight impact to their profits, analysts say.
In addition, the government is paying less attention to the security measures of airfreight companies than to that of consumer airlines. Because mail already has been well-policed with drug checks, X-ray scanning and bomb-sniffing dogs, most analysts believe that government authorities won't demand many security changes in the airfreight industry.
So it follows that appropriate valuation metrics for such companies remain basically the same.
"Sept. 11th was a horrible, tragic event, but what a
airfreight company is worth doesn't change because of a terrorist attack," says Donald Broughton, transportation analyst for A.G. Edwards. "It doesn't change the way you value
In essence, then, no easy generalities about valuing companies exist. Analysts, like investors, need to consider each industry according to its particular situation.
But here's one factor analysts can't escape: The economy's reaction to this tragedy will write history -- not reflect it.
And that's one of the few certainties Wall Street can count on.